哈里伯頓 (HAL) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Halliburton first quarter 2007 earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Evelyn Angelle, Vice President Investor Relations. Ma'am, you may begin.

Thanks, Matt. Good morning, and welcome to the Halliburton first quarter 2007 earnings conference call.

Today's call is being webcast and a replay will be available on our Web site for seven days. A podcast download will also be available. The press release announcing the first quarter results is available on the Halliburton Web site.

Please note we have two changes to our historical presentation of results. First, we have reflected KBR's operations as discontinued for all periods presented because of the separation that recently took place.

And second, as we discussed in our last call, we have reviewed our corporate cost allocations in light of the KBR separation and have reclassified certain corporate costs from the segments to our general corporate caption on the income statement. All current and prior periods presented reflect these changes.

Today, we will not be commenting on KBR's results for the first quarter. These results will be addressed by KBR's management on their earnings call on May 4th at 10:00 a.m. Central time.

Joining me today are Dave Lesar, our CEO, Chris Gaut, our CFO, and Andy Lane, our COO. In today's call, Dave will provide opening remarks, Chris will discuss our overall operating performance and financial position, followed by Andy who will review our regional and overall business outlook and provide insight into some of our recent technology achievements. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Dave, I would like to remind our audience that some of today's comments may include forward-looking statements reflecting Halliburton's views about future events and their potential impact on performance.

These matters involve risks and uncertainties that could impact operations and financial results, and cause our actual results to differ from our forward-looking statements. These risks are discussed in Halliburton's Form 10-K for the year ended December 31, 2006 and recent Halliburton current reports on Form 8-K.

Now, I'll turn the call over to Dave.

Thank you, Evelyn, and good morning to everyone.

We finalized the separation between KBR and Halliburton earlier this month with an exchange offering that resulted in Halliburton bringing in approximately 85 million shares back into the treasury. We believe the separate ownership of the two companies benefit shareholders of both Halliburton and KBR and on behalf of all Halliburton employees, I'd like to express to KBR and its management best wishes for a successful future.

Now, let me turn to our oilfield services business. First of all, I believe we need to point out that there were two large items that we discussed in our fourth quarter call and results that impacted the sequential comparison of operating income. Those were the $48 million in gains we realized from selling our lift boat operations and $38 million in insurance proceeds related to the 2005 Gulf of Mexico hurricanes and Chris will discuss these a little bit later.

We had many good things happening this quarter. It's worth noting that we've had very positive trends in our Fluid Systems, Drilling and Formation Evaluation divisions. Even with the challenges in North America, these divisions each posted good sequential revenue growth.

Our Sperry, Wireline and Perforating, Cementing and Baroid product lines had their best revenue quarters ever. And even did very well in the U.S. somewhat offsetting some of the delays in U.S. stimulation and completion activities and I'll talk about those in a moment.

Outside of North America, Cementing revenue grew sequentially with each region contributing in a balanced manner to our growth. Our Sperry and Wireline and Perforating operations showed strength, as I said, both in North America and in the Eastern Hemisphere.

And despite weather and other issues, we saw our customers continue their U.S. drilling program. We're also seeing a shift toward more directional drilling in the U.S. land market, and I think you'll see this reflected in Sperry's results moving forward, as we have some very good directional drilling technologies for those types of wells.

And as we've said, a good portion of our 2007 capital spending is directed in growing our Sperry and Wireline and Perforating operations, particularly in the Eastern Hemisphere. However, the positives were overshadowed in the first quarter by the results of our well stimulation business.

We announced last month that we were experiencing lower than anticipated customer activity in North America, particularly the stimulation market in Canada and the U.S. Rockies. Some of this activity decline was attributable to poor weather, including an early spring break-up season in Canada and severe weather early in the quarter in the U.S. Rockies and mid-continent areas.

In addition, the unusually warm start to the U.S. winter caused concern about natural gas storage levels, which then negatively impacted the price of natural gas. This uncertainty made many of our customers more cautious about their completion and stimulation plans in the early part of the year, and these items clearly impacted our volume.

Predictably, first quarter pricing for our frac services in the U.S. compared to the fourth quarter was mixed. By mixed, I mean that pricing was dependent on the reservoir basin, the mix of services, and competitor capacity in a particular area.

Some pricing was up and some was down. But overall, and this may surprise some people, our frac pricing in the U.S. actually showed a slight increase from the fourth quarter. But the customers from which we work reduced their volumes in the first quarter, however, in Canada, pricing is clearly decreasing.

During the first quarter, we took advantage of this slowdown in the U.S. to perform a higher level than normal maintenance and preventive maintenance on our equipment. Our equipment has been highly utilized for a long period of time and will benefit from this additional repair and maintenance performed.

We also took the opportunity in Q1 to provide additional training to our newly hired and existing employees during this slower period. These types of activities impacted our costs during the quarter with no incremental revenue generated.

We don't expect these types of costs to be recurring. But we thought it was a good opportunity to take care of these things while we were sidelined due to weather and other activity-related slowdowns, and I think this will pay off in the coming quarters.

We have taken steps to address the reduced drilling and production activity in Canada. As we mentioned in our last call, we've already deployed equipment out of the Canadian market into markets where the equipment can and will be more highly utilized.

For example, in Canada, we have now reduced cementing capacity by 40% and frac capacity by 33% by redeploying this equipment elsewhere. In addition, we've reduced personnel in Canada. However, in the U.S., we expect volume to pick up. So looking ahead, we feel positive about activity levels for the U.S. in the second half of the year.

Now that natural gas price market in the U.S. has rebounded, we're seeing stronger commodity prices, both spot and strip price. We're also starting to see customer activities increase, as evidenced by a nice improvement in March.

As I said earlier, some of our customers consciously slowed their well stimulation activities during the winter months. These customers have shared with us their plans for increased activity during the second half of the year. We are well positioned to service these customers due to the contracts we already have in hand.

With this information in mind, we've chosen not to adjust our 2007 capital deployment plans for the U.S. and currently do not have any plans to reduce our work force in the U.S. We will, of course, keep an eye on attrition and if necessary make adjustments to our hiring plans.

Now, before I turn the call over to Chris and Andy to provide a more detailed analysis, I'd like to address a couple of other issues in our first quarter results when compared sequentially to the fourth quarter for two additional areas, completion tools in the Middle East-Asia region.

In completion tools, we saw a big push for the year and had many shipments in the fourth quarter. We then experienced some declines in product sales on a sequential basis. This was exacerbated by a very disappointing performance by Well Dynamics, our intelligent well completion joint venture, which actually posted a loss in the first quarter.

This happened because certain supply chain constraints made us unable to reach our shipment goals and, therefore, we have deferred revenue into future periods. However, demand for intelligent well completion products continues to be strong.

We were, however, unable to finalize the manufacturing on some of these tools by quarter end. We've already taken the appropriate steps to address these issues and expect improved Well Dynamics results during the second half of the year.

Second, the Middle East-Asia region is showing a decline in both revenue and operating income on a sequential basis. This decline is isolated to our Asia region. Asia results reflected our previously discussed decreased emphasis on direct sales into countries like China and India.

It also included a decline in Well Dynamics, as I've just discussed, and of course, the Landmark seasonality. In fact, the Middle East showed an 8% revenue growth sequentially and an 18% operating income growth sequentially. The Middle East showed revenue and operating income growth in all divisions, except Landmark, which was impacted by its usual seasonal decline.

We view the Middle East as an important growth area and will continue to invest resources there, both people and equipment. And our leadership team is committed to fostering customer relationships in that part of the world, particularly with national oil companies.

So while our first quarter results reflected the best first quarter in Halliburton's history, we're not satisfied with the results. We continue to face some challenges in the North America market, but I think we have demonstrated in the past that we can work through any issues that might continue to come at us in a North America stimulation market.

I have great confidence in our people and our customers have confidence in us because we have the right mix of people and technology. And I believe that we'll deal with whatever the market gives us.

Let me turn the call over to Chris now for some more details.

Thanks, Dave. I will discuss our first quarter results compared sequentially to the fourth quarter.

Halliburton revenue in the first quarter was $3.4 billion. That's down 3% from last quarter. The drop in revenue resulted from a typical seasonality we see in our Landmark sales, lower direct export sales of equipment, weather-related or seasonality in markets such as North America, North Sea, and Russia, and decreased customer activity related to natural gas applications in North America.

Regarding non-North America revenue, the sequential reduction is more than explained by the change in Landmark sales, completion product sales which are normally higher in the fourth quarter, accentuated this quarter by lower shipments from Well Dynamics, as Dave mentioned, and we had lower direct export sales of equipment in Q1.

Operating income decreased $135 million to $788 million. $86 million of this 135 change is explained by special items from the fourth quarter.

The fourth quarter results included a $48 million gain on the sale of our lift boat operations, as well as approximately $38 million in business interruption insurance proceeds related to the 2005 hurricanes in the Gulf of Mexico. The usual seasonal decline in Landmark sales explains most of the remaining difference.

Our diluted earnings per share for the first quarter was $0.54, consisting of $0.52 from continuing operations and $0.02 in discontinued operations from our 81% ownership of KBR. Note that we did not have the benefit of the reduced share count from the KBR split-off in the first quarter.

Similar to the reporting in our pro forma financial statements filed with the KBR split-off transaction, the 85 million Halliburton shares we brought in in early April would have added $0.04 to our first quarter earnings per diluted shares on our continuing operations.

Now, I will highlight the segment results. Production Optimization operating income decreased $130 million from the fourth quarter. And let me provide a quick reconciliation of that decrease as there are really three categories of factors at work here.

Unusual fourth quarter items, which were half the variance, items affecting our international business that are specific to the first quarter and account for about one-fourth of the variance, and finally, the slowdown in demand for our production enhancement services in North America.

Let me explain the impact of each of these and the impact that they had on operating income for our Production Optimization segment from Q4 '06 to the first quarter of '07. First, in the fourth quarter, we recorded the gain on the sale of the lift boats as well as significant hurricane insurance proceeds.

We also recognized less operating income during the first quarter, due to the sale of the lift boats, of course. These items explain approximately $64 million on the sequential operating income comparison for Production Optimization.

Second, specific international items reduced operating income by approximately $33 million. Certain of our well stimulation vessels had low utilization during the early part of the year because of North Sea weather and other downtime.

We also experienced the usual first quarter seasonal issues in Russia, and weather or contract delays in Australia and the Caspian area. Also, the manufacturing and supply chain issues related to Well Dynamics, coupled with high year-end sales in traditional completion tools contributed to this international variance.

Finally, most of the balance of the decrease, or $33 million, related to reduced well stimulation activity in the U.S. and Canadian markets, and increased repair and maintenance expenses incurred during the downtime.

Fluid Systems operating income decreased $3 million, but remember, the fourth quarter included most of the hurricane insurance proceeds in this division. Eastern Hemisphere operating income increased 28% sequentially reflecting margin improvement in both cementing and Baroid.

Cementing showed strength around the world except for the softness in the U.S. Rockies and a slower than anticipated pickup in Canada. Cementing in Mexico showed good growth from the fourth quarter. We were also able to implement some price increases in Latin America on contract renewals.

We see an increase in offshore activity coming in the Middle East and West Africa, where additional rigs are entering the market. Baroid Drilling Fluids benefited from higher activity and our more favorable job mix in Africa. This was partially offset by some job delays in Venezuela and decreased activity in Indonesia.

Drilling and Formation Evaluation operating income increased $18 million from the fourth quarter. Sperry Drilling Services experienced operating income growth in all regions with particularly strong performance in the North Sea, Asia, North America, and Latin America.

Wireline and Perforating had a slight decline in operating income attributable primarily to lowering activity in Latin America and our decreased emphasis on direct sales into Asia, offset by increases in the Middle East and Africa. Our drill bit business posted strong operating margins in the first quarter despite the slowdown in Canada which is an important market for that product line. Operating income was favorably impacted by an increased mix of fixed cutter sales in the U.S.

In the Digital and Consulting Solutions segment, operating income decreased $27 million in the first quarter, due to Landmark's strong year-end software sales activity related to customer's traditional year-end buying patterns. However, on a more comparable year-over-year basis, the Landmark operating income increased 13% due to improved sales of software primarily in Europe and Asia-Pacific.

Now, let me address some financial items. We expect our depreciation and amortization to be approximately 135 to $140 million per quarter during the remainder of 2007.

The effective tax rate for continuing operations in the first quarter was 33%, lower than the 35% we had said previously for the full-year 2007. The rate in the first quarter was impacted by favorable tax settlements and the separation of KBR has reduced our effective tax rate. We expect the effective tax rate for the remaining quarters of this year to be in the 33 to 34% range, so this is a continuing benefit.

As Evelyn mentioned, and as we indicated in our call last quarter, we have changed the types of costs we classify as general corporate. When KBR was part of Halliburton, certain corporate stewardship costs were allocated wherever possible to either ESG or KBR, rather than classified as general corporate. Examples include certain legal, treasury, accounting, tax, and internal audit costs.

These costs consisted mainly of personnel and third party professional services, and were allocated based on which part of the business they primarily served. For example, our internal audit department has certain personnel dedicated exclusively to ESG and others to KBR.

The KBR specific costs generally moved with KBR, so we think it's now more appropriate to classify the remaining costs as general corporate. This change will also result in more relevant comparisons between our results and those of our peers. We expect general corporate costs to be approximately 65 to $70 million quarterly for the remainder of the year.

As of today, we have approximately $1.7 billion remaining on our share repurchase authorization. Due to the KBR exchange offer and the quarter-end reporting process, we have not been in the market so far this year, however, we plan to be back in the market shortly.

Now, let me address shares outstanding. As a result of the KBR split-off transaction, we repurchased approximately 85 million, or 9% of our outstanding Halliburton shares. Our earnings per share calculation will reflect this reduction in share count effective April 6th and going forward.

So we will still include those 85 million shares in our EPS calculation during the entire first quarter and we do so for approximately the first week in the second quarter. As I mentioned earlier, this reduction in shares would have added $0.04 to our continuing operations earnings per share for the first quarter, and demonstrates the accretion of the split-off transaction.

We've illustrated how our 2006 balance sheet and income statement would have been impacted by the exchange offer, including the reduction in share count, in the pro forma financial statements we presented in our Form 8-K filed on April 6th.

I'd like to point out that we will be reporting a gain related to the KBR separation transaction. This gain, which will be approaching $1 billion, will be reflected in discontinued operations in our second quarter results.

In addition to this very large gain, let me address a couple of other items that may impact our second quarter results. We have held a minor ownership interest for some time in Dresser, Inc. That's the old Dresser Equipment Group that we sold in 2001.

We expect to sell our remaining interest during the second quarter of 2007 and realize a gain of approximately $50 million. This gain may be offset by an impairment charge related to an interest we have in an oilfield in Bangladesh. We've held this interest for some time and this potential impairment would arise from an updated reserve study that is expected to be done in the second quarter.

Andy?

Thanks, Chris, and good morning, everyone.

First, I'd like to comment on our latest acquisition. This morning, we announced we have entered into a definitive agreement to purchase PSL Energy Services, a leading Eastern Hemisphere provider of processed pipeline and well intervention services. This company brings to Halliburton a strong suite of proprietary service technologies that will expand our production enhancement technology offerings as well as improve our balance for this product line outside of North America.

This acquisition increases our Eastern Hemisphere production enhancement operations by the following: Head count by 45%, hydraulic workover capacity by 80%, coiled tubing unit capacity by 20%, and nitrogen capacity by 50%. This acquisition puts us in the number one position in pipeline processing services both in the Eastern Hemisphere and globally.

Now, I'll address each of our regions, beginning with the Eastern Hemisphere. Our Europe, Africa, CIS region first quarter revenue showed a $55 million decline from the fourth quarter, which reflected a strong seasonal fourth quarter for our traditional completion tools and Well Dynamics businesses and less revenues due to the lift boat disposition.

We experienced seasonal weather-related declines which impacted activity in Siberia and Caspian areas. As Chris mentioned, first quarter vessel activity was affected by downtime, but we expect increased utilization of these vessels through the remainder of the year.

Our outlook for this region is positive. For example, Sperry is making a market entrance into Angola by leveraging our drilling and measurement technologies. We're mobilizing on a new cementing contract in Algeria and we're anticipating an increase in activity in Libya as we continue to expand our business in this growing market.

Baroid is continuing to grow its service solutions business in the environmentally [sensitive] North Sea. We offer total service solution technology to the North Sea operators including our bulk cutting storage services integrated with our cutting slurrification and injection technologies and our new offshore cutting processing system.

Cementing is also delivering new technologies to the demanding North Sea market. High pressure, high temperature demands create tremendous stresses and strains on the sheets and Halliburton will deliver long-term zone isolation solutions to these challenging wells.

In addition, our new insurer retarder was formulated and introduced to meet the stringent environmental and performance requirements for this market. Also, our award-willing super filled surge reduction system provides operators with high flow rate, full openings, casing tools, which reduced casing running time and enhanced primary cementing success.

Dave has already addressed the results of the first quarter Middle East-Asia as compared to the fourth quarter, including our 8% growth in Middle East revenue from the last quarter. I'd like to give you some insight into our operations in our Middle East-Asia region. Sperry's Slimhole Geo-Pilot Rotary Steering System achieved a new drilling record in the AFK field in Saudi Arabia, with a rate of penetration 31% above the average field rate of penetration and 20% above the best offset well.

In addition, we also opened a real-time remote operating center in the Kingdom which is currently supporting eight rigs on the Khurais project. By early intervention and decision making, the center is already reducing non-productive time and positively impacting the drilling operation and helping our customer to deliver the wells faster.

The Khurais project is progressing very well. The wells are more productive than originally thought and because of our performance we've been asked to take on additional rigs outside of the Khurais field.

Completion tools continues to be successful in the acquisition of new business in Asia, having been recently awarded a multi-well tender for deep water completions and gravel tech services in India, and an extension and an expansion of an existing completion contract in Thailand. Our customers continue to recognize the quality and the reliability of Halliburton's completion tools.

Now, I'll turn to the Western Hemisphere. We continue to see major project wins in the U.S. as our customers recognize the value that Halliburton can provide their assets through the integration of our technologies. We have recently been awarded a multi-year project in the Piceance Basin based on our ability to generate asset performance through technology application, as well as excellent and safety and service quality.

Several of our technology applications differentiate Halliburton as the leader in well stimulation services. For example, our Exact Frac Microseismic service incorporates real-time fracture mapping with our proven stimulation services to optimize stimulation treatment, placement in complex reservoirs.

Our Delta Stim completion service facilitates increased production and ultimate recovery by increasing the effect of multi-zone treatments in horizontal well bores. Horizontal gas wells in the Cotton Valley Taylor, the Bosier Sand and the Barnett Shale formations in Texas have responded with excellent results to this technology. In the first quarter of the introduction of this service, we have deployed 82 Delta Stim fleets.

Our PropStop service answers the recognized need of eliminating prop and flowback after a well has been fractured. Our leading position in resin technology has led to the deployment of PropStop in Arkansas, Oklahoma, Texas, and in the Southern Rockies.

And we have on average doubled the number of GasPerm 1000 applications every quarter since its introduction early last year, with 1325 applications during the first quarter of 2007 alone. GasPerm 1000 technology mitigates fracture face damage in low perm reservoirs.

All of these frac technologies are developed and initially applied in North America, then subsequently introduced to international markets. For example, our pinpoint stimulation techniques were developed and perfected in North America and have been successfully applied in Middle East, Asia, Africa and Eurasia with 25,000 zones and 3600 wells treated globally to date. Halliburton is recognized as the market leader in multi-stage pinpoint reservoir stimulation.

In Latin America our revenues declined slightly from the fourth quarter. We had a strong year-end software sale contribution from Landmark in the fourth quarter. In Venezuela, using Landmark's acid decision solution, ADS methodology and tools, a redevelopment plan for a mature field was created and increased production by 500% and will expand the anticipated production plateau up to 20 years.

The project, expected to take in excess of one year to complete using a traditional field study approach, was completed in five months using Landmark's ADS approach. Outside of the Landmark seasonality, Latin America showed growth particularly due to higher demand for Sperry's pilot suite of drilling tools, our Baroid drilling fluids and cementing services.

The successful introduction of our Cobra Max fracturing service, a member of the pinpoint stimulation family, has led to an award of 10 additional wells for a major local operator in Argentina. In Mexico, we were recently awarded multiple completion tool contracts which utilize our Easy Well, our VersaFlex and our CoreFlex technologies.

Now, I'll turn the call over to Dave for some closing comments.

Thank you, Andy.

So as you can see, we clearly were negatively impacted the last two quarters by a slowdown in the U.S. and Canada. And where appropriate, we've reduced personnel and moved equipment to higher utilization areas. But overall, we're looking to increased well stimulation activity in the U.S. during the second half of this year.

And our international growth plans remain intact and you should see the results from our investments over the coming quarters.

Now let's turn it over for questions and see what's on your mind.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Jim [Klendell] of Lehman Brothers. Your question, please?

Good morning.

Good morning.

Could you comment on the, I guess, the trend in North American land stimulation pricing? You indicated it was somewhat of a mixed bag and your average realization was in fact maybe up a touch in the first quarter. But with new capacity coming on, are you looking for some deterioration in land pricing and perhaps you could discuss the magnitude going forward?

Yes, Jim, good morning.

As we said, we saw moderate increases, if you look first quarter 2007 back to first quarter 2006. If you look sequentially first quarter 2007 to the fourth quarter 2006, we were flat to up slightly.

We continue to see, as Dave said in his comments, pricing pressure with certain customers, certain projects and in certain basins based on capacity, but for looking forward, we still see it to be flat to slightly up as a blend, and we're more bullish on it later in the year, as we expect the capacity to get tight as the activity picks up in the second half of the year.

So you're saying Q2 versus Q1, you still expect to be flat to slightly up in terms of pricing?

Yes, we still expect it to be flat as an (inaudible). There's going to be pricing on pressure down and pressure on pricing up in certain areas of the U.S. but as a whole, we expect to be flat.

Okay. Interesting. Thank you, Andy. That's it for me.

Thanks, Jim.

Our next question is from Ken Sill of Credit Suisse. Your question, please?

Yes, good morning, guys.

That was an interesting answer on pressure pumping but I guess I'll go to the other big question which is the acquisition that you guys are making, you know, when do you expect that to close? And can you give us some sort of feel on what kind of, you know, what the revenue run rate for those guys has been in the past and what kind of margins they've gotten?

It is a private company, and we haven't closed the deal, so we can't disclose financial information at this point in time, Ken. We do expect the deal to close within 60 days. And the timing for that is that there are a number of regulatory filings that need to be made.

But as Andy said, that it will be significant and certain of our sub product lines in the Eastern Hemisphere within our Production Optimization segment.

I would expect then when it closes we'll get another press release or we will just, you know, giving --

We will give you some better profile of the financial impact that it will have once the deal closes, but we're subject to confidentiality of course now.

I understand that. Thanks.

Ken, what we like about it is it brings good balance of production enhancement where we're heavily weighted toward frac in the U.S., in the Eastern Hemisphere it's mostly coiled tubing intervention, acidizing-type services, and this brings us a lot more capacity in all Eastern Hemisphere revenue.

It sounds really good. I'm eager to hear more about it. Thanks.

Our next question is from Dan Pickering of Pickering Energy. Your question, please?

Good morning, guys.

You did a good job of helping us understand the sequential changes in the international business. I'm just curious, as we look forward from here, a lot of the seasonality ought to sort of have played out, and do you expect your margins in the international business in general to kind of move back up to where we saw them in the third and fourth quarters of last year?

Yes, Dan, we do expect some improvement in our margins internationally. But, you know, the driver on our international business is volume and activity. And these additional contract wins that we have, it's not so much that one should expect big movements in price.

Okay. That's helpful. Thank you.

And then if you could just clarify a little bit, I guess I was confused by the announcement on the 20th of last month, you sort of gave us an update about how the quarter was progressing, I think because of the KBR process that was ongoing. As I read that press release it made me think that the North American business had been surprisingly soft, and I guess as I looked at it, it turns out North America didn't look too bad relative to expectations.

I'm just wondering if something between the 20th and the end of the quarter, or I mean North America tracked as you expected from that March announcement onward?

A couple of things on the press release and actual results. The press release pointed to specific divisions within North America and what we're -- what you're seeing in the results here is that overall in North America did okay, so it was a mix of weaker performance in our production enhancement product service line, offset by pretty good performance in our Drilling and Formation Evaluation, in Landmark, and in completions and Baroid, and even a bit of a come back in cementing.

Dan, it was very much a drilling cycle. We stayed very busy and had a very good quarter in cementing, Baroid's and our Wireline and drilling businesses. It was largely impacted by the discretionary delays on the completion side and, which it impacts us significantly with the fracturing business. So that's how the quarter played out for us.

Now, the guidance that we gave, of course, in the March press release, that was before the separation and that was for the Company as a whole, as it was then, including KBR. And so one should keep that in mind that that was relative to KBR, not what we're now calling -- that is for the Company as a whole including KBR, not what we're calling now as continuing operations.

I understand. Okay. Thank you.

Our next question is from Kurt Hallead of RBC. Your question, please?

Good morning.

Good morning, Kurt.

Thank you. Guys, I just had a question here.

First, when you look at your non-North American business on a geographic basis, can you give us some insight as to what region you think will offer the highest year-on-year growth rate versus 2006? And then if you can, whether or not you think those growth rates in those varying regions may accelerate off of what you experienced in 2006?

Yes, Kurt, good morning. Let me start and then Chris will add some color to it.

But we're very bullish on continued growth in Middle East and Africa is the two primary regions where we see the most accelerated growth. And then following that would be Europe, Eurasia, of course, Russia and North Sea pick up now after the first quarter weather is behind them and then improving over the year in Asia.

Okay.

And then you see sort of the acceleration is primarily in the Middle East and Africa, and (inaudible) I don't want to put words in your mouth, I'm just trying to understand how you view the world. So you see accelerating growth rates in all your geographic regions outside of North America on a year-on-year basis?

Yes, Geoff, we see growth across the board.

Growth across the board with Middle East and Africa excelling over the rest.

And no change in our growth expectations there outside of North America.

Okay.

And then a couple of your competitors this week referenced expectations of incremental margins, you know, north of 30% or so for 2007 versus 2006. I know you typically don't provide any guidance.

I'm not looking for guidance, I'm just wondering whether or not we should think of your business in [any] different terms than what your competitors may have mentioned this morning?

I don't think you should expect a big difference or any disadvantage on our part, that's for sure.

And then just if I may, a real quick one. What was your Canadian revenue in the quarter?

I'm sorry, Kurt, we don't break out that specific country, but clearly, it was up slightly from Q4 just because, you know, seasonally it is, but boy, it was pretty weak compared to last year.

Great. Appreciate it. Thanks.

Our next question is from Geoff Kieburtz of Citigroup. Your question, please?

Thanks. Good morning.

Last conference call, I forget who actually said it, but somebody said that you expected your oil service margins in the U.S. in '07 overall to be basically equal to what you saw in '06. Now with one quarter behind us, can you say that still?

Well, that's a good question, Geoff. You know, I think we are getting the benefit of good performance from a number of our product lines, but the question is going to be production enhancement and just how the pricing picture unfolds there. And that is uncertain and we'll just, you know, depend on how the market behaves and there's no point in us really signaling what our pricing strategy is to our competitors here on the call.

That is our objective to maintain our margins in the U.S. and in North America but, you know, we're working on that by cutting our costs aggressively in Canada, try to maintain or control the decline in Canada and in the U.S., we have the mix of improving businesses, we expect good activity in our well stimulation business, but the question mark is going to be on the pricing side.

Kind of related to that, we did hear from somebody else, comments about intensifying price competition in the bits and fluids, I think drilling fluids specifically, in the U.S. market. Are you seeing that as well?

I think where we're reasonably satisfied with both of those, security had a good quarter, considering the weak Canada market, and Baroid, I think, is competing very strongly in North America.

Okay. So you're not seeing that same effect.

And then last question, if I could. You referenced Eastern Hemisphere contracts a couple of times and I just wondered if you, you know, look at this, or are there -- is there a time in which you're going to see a meaningful step-up? I mean in the start-up of contracts or are these going to sort of roll in on a fairly steady basis over the course of 2007?

Well, Middle East is the big one we talked about and our big contract in Saudi Arabia is continuing to grow, the Al Khurais project, through probably the third quarter and then it will be at full scale, and the other ones are more evenly spread over the year, wouldn't you say, Andy?

Yes, Geoff, we definitely see them rolling in throughout the year. We have an awful lot, a large number of projects built to bid this year that we expect to be successful on the roll in towards the end of 2007 into 2008.

Okay. Great. Thank you.

Our next question comes from Scott Gill of Simmons and Company. Your question, please?

Yes. Thank you. Good morning, gentlemen.

Good morning, Scott.

Andy, I think I may have missed your commentary on the U.S. directional drilling business. Could you just give us what the growth rate for Sperry was in the U.S. for the quarter?

And I'd also like to hear your perspective with respect to the outlook for demand growth going forward for U.S. directional drilling and perhaps what the pricing environment's like.

Well, our growth rate in BFE for the quarter there, from a revenue standpoint overall was 5%, and of course Sperry was at the high end of that, I mean was much higher than that, as Wireline was flatter, given that Production and direct sales and security having a good quarter, but more impacted by Canada.

So the growth rate in Sperry was quite good. And their contribution to results was also strong from an operating income standpoint.

Scott, we see an expanding market in the U.S. with the adoption of more and more horizontal drilling, so that will impact us positively both with Sperry and drilling because we've been concentrating with Sperry on Eastern Hemisphere as it's been a very mature drilling market here in the U.S. land, but with horizontal drilling, it plays to our strengths, so you'll see more deployment of Sperry and more emphasis by Sperry on the U.S. land market in addition to what we already do in the Gulf of Mexico. And that will benefit us in both the drilling side but also on the pinpoint stimulation side on PE.

Okay. And just an unrelated follow-up.

You mentioned start up of a manufacturing facility in Mexico. What products will you be manufacturing there and if you could just give us some color on your outlook for the Mexican market over the next couple of years?

Yes, Scott, we're going to primarily be focused on completion tools and casing equipment, casing attachments, so those two product lines for us, the main emphasis there. And it's just part of our expansion.

As we announced at the analyst day, expansion to Mexico, Brazil, Singapore, and Malaysia, and all four of those plants are under way at different stages, and Mexico is the first one to actually open for us.

But as far as the Mexico market, we have a very good position there and our conventional business, and of course, we've had mixed results in the integrated project business down there, but we feel very good about just that core discrete business and the growth opportunities we have there.

Next question?

Our next question is from Brad Handler of Wachovia Capital Markets. Your question, please?

Thanks. Good morning.

Good morning, Brad.

Could you guys please speak to your acquisition strategy and sort of update us on your thoughts more generally relative to your initial targets of 1 to $2 billion a year goal?

Sure, Brad. Well, first of all, you know, I would not characterize it as a target. We don't have a budget for acquisitions or anything like that.

The number that we have used in the past was just to try to give folks an order of magnitude and point people to the fact that we're looking for acquisitions that, you know, are not transformational but rather are additional products, technologies that are additive to the Company. So -- such as the acquisition we did in the wireline business, to give us an additional source of equipment, of platforms that we could put through our technology.

That's in the North America market there. We want to increase our penetration of wireline market in North America. And now, in the pipeline process, and slick line, and hydraulic workover business in the Eastern Hemisphere, give us some additional distribution channels there from which we can both use the technology that this company would be acquiring has and roll it out through our system, but also compliment their equipment and process with some of the things that we have.

So the strategy is to leverage our distribution system, by acquiring products and services, but in select geographic markets, to pick up additional equipment or services or technology, you know, that we can use to grow our business in our targeted areas.

Brad, just to add a comment. Chris covered it very well, but you look at the last three Easy Wells, technology application out of Norway, we've seen tremendous uptake for that product, when we sell it through our business development channel, and the Ultraline is working out very well for us in Canada, and then we're very excited about the PSLES acquisition.

These are all businesses we know very well, very quick uptake from our business development side as far as selling these services, and some efficiencies in operational side as we look at the combined facilities of the companies.

Nut we don't have any budget or target for size of acquisition in a particular period.

Okay. I appreciate that kind of qualification. That helps me.

Can you, as you look forward, in terms of the opportunities that you are pursuing currently, we don't use the word target from an order of magnitude standpoint, do they measure up and are you still comfortable with that, again, I won't go back to the $1 billion of give or take, but that's still the right order of magnitude for us to be thinking about over the next couple of years in terms of opportunities?

Well, the driver is opportunities, good opportunities and the timing at which those come along here. Brad, as you can imagine, we look at a large number of potential opportunities and then those get filtered down and, you know, the timing in which deals close is the difficult thing to control.

So we are looking at a significant number of things, a much smaller number is far along in the process, but we do have some things that we are very actively working on. But again, these things fit in the mode of the strategy we were talking about before.

Sure. That's helpful. If I may just sneak in one unrelated one.

Okay.

If I'm still on the line. Great. Thank you. Appreciate that.

There's some talk out there about another Saudi Aramco project, Manifa, sort of teeing up. Can you give us some context on the timing of that and whether or not your experience with Al Khurais gives you sort of particular advantage as you approach that project, or conversely does the scale of how much you're doing somehow limit your abilities as it relates to another large scale project?

Yes, Brad, let me start discussing that.

Manifa is the project. It's an offshore project but with the goal that Saudi Aramco will begin with offshore operations initially and then build man-made islands with causeways and actually service some of the wells as more traditional land operation towards the end of the project. It's another massive Saudi Aramco project.

We talk about adding 1.2 million barrels per day from Khurais. Manifa's in the 700 to 800,000-barrels a day range. So it's another major project. I think our performance on Khurais has positioned us well for this project.

It is another critical drilling project so our Sperry product line will lead our efforts also in this project. And our ability that we already put the infrastructure in in our central operations center, in our real-time operations center addition to that, is a very good performance indicator for us.

Our next question is from Mike Urban of Deutsche Bank. Your question, please?

Thanks. Good morning.

The only question I had left was, and sorry to kind of parse your comments, but in the Rockies, and I guess North America in general where you've had some of the delays, you did characterize them as delays rather than reductions and said that you expect some activity recovery in the second half.

Where, in some of those markets that you've had a slowdown, where do you stand right now? Have some customers come back? Some operations come back? I guess maybe if you could, characterize it relative to, say, late last year, kind of before the weather issue set in?

Mike, let me start that one. It's, of course, we were impacted November, December, January, February, those four months primarily a lot of that was weather, some was customer choice of projects, but many of our customers that we have a lot of activity planned for this year that were slow in the first two months of this year, we saw them pick up in March.

One customer, just to give an example that we did not do any jobs for in January and February added 19 frac jobs to the board in March and April. So we see our customer base that was by choice slower in the first two months, or by weather, picking up in March and we'll see how the activity goes, so we expect it to pick back up and strengthen in April, May, and June.

It's not yet back to the peak level of the third quarter of last year, Mike.

Okay. That's very helpful.

And unrelated follow-up, digital consulting is typically down here in the first quarter, so not unusual, but looking out over the last few quarters on a year-over-year basis, the growth kind of running below where it has been. Is that just a function of the high growth rate previously, timing, or is it, you know, is it Landmark or is it some of the other things that are buried in there?

Mike, it's the other things. Landmark's doing very well. Had a very good first quarter.

What we have in there also is our project management in oil and gas. And so it's a reflection on the project management revenues as those projects come and go in our mix. So it's not related to the [core] Landmark. I feel very good about that business.

We had that very large project management contract in Mexico in the first quarter of last year.

Okay. Great. Thank you.

A little bit lower on oil and gas revenue this quarter.

Okay. Great. Thanks.

Matt, let's take two more questions.

Our next question is from Geoff Kieburtz of Citigroup. Your question, please?

Thanks.

As a follow-up, you mentioned earlier in the U.S. market that the degree of pricing competitiveness in the stimulation business varies from region to region. Do you think with that in mind that the assets at Halliburton are properly deployed or do you foresee that you're going to be rearranging things as we go through the year?

Well, Jeff, I think they're properly deployed. And we spend a lot of time, as you'd expect, with the amount of assets and people we have tied to that business, analyzing the markets and the trends and we have moved equipment around.

We've moved equipment from the Rockies to South Texas depending on the weather, we wanted to take advantage of the better weather in South Texas, but we continually, on a weekly basis, look at the best deployment of our equipment and people around the U.S., and as Dave said, we moved 30 to 40% of that equipment out of Canada because we saw much better return in the U.S., and of course, the spring break-up in Canada. But I can promise you it's something we watch very closely and the management in the U.S. market spends a lot of time properly positioning.

And if I could, I think it was Chris that mentioned that in the quarter, took advantage of the softness in the market to do some extra maintenance and to step up, I guess, a little bit the training level. Would you be willing to give us, you know, a ballpark number on what kind of extra costs were associated with that that might not be, you know, sustained going forward?

Yes, Geoff, roughly $10 million.

Okay. Thank you.

Our final question comes from Michael LaMotte of JPMorgan. Your question, please?

Thank you. And let me say thank you for going through the margin variances on the quarter as well. That was very helpful.

As we start to look at Q2, Q3, Q4, the balance of the year, I'm wondering how much of that variance can be stepped up moving into the back half of the year or how much sort of rolls through? Are there going to be other project shipments and other issues sort of popping up that smooth out the margin improvement or, you know, margins as we go through the year?

Sure, Mike, I think you're referring to the variance explanation I was giving on operating income. For Product Optimization, that $130 million. And the first two elements of that, which represented three-quarters of the variance, are nonrecurring, if you will.

Understood. I guess it was really more the project stuff and the shipment issues related to Well Dynamics.

Mike, I mean Well Dynamics, the demand for smart wells and completion equipment still is very strong. And so it's just a matter of, we haven't lost any sales there, it wasn't a problem, we had plenty of demand, it's just the ability to get it through the supply chain, manufacturing cycle, and so we see that just rolling into the second, third, and fourth quarter deliveries. It still is a very high growth business for us.

But lumpiness is not something that we should -- it should be expected to continue, the business will be lumpy going forward, I guess, is what I'm hearing from you.

Yes, Mike, completion as a general big business is lumpy with a lot of discrete in shipments, but because Well Dynamics scale is smaller you'll see even more lumpiness in that business but it is a completion business and those are lumpy.

And then just a final follow on, Dave, I guess you had mentioned that the capacity reductions in the Canadian market, pretty significant in stimulation and cementing. I'm wondering if, a couple of competitors have talked about the fourth quarter of this year being, you know, the first quarter perhaps where we'll see year-on-year rig count growth again in Canada, perhaps a robust '08.

How dong long does it take to mobilize that equipment back up there in the event that we do see a recovery in that market? How fluid is that equipment?

We, at this point don't see -- we can't see the certainty of a recovery in Canada. So we're not going to put a time line on that. Andy, about the --

Yes, but Mike, just about the movement, we routinely have moved equipment during spring break-up anyways just a traditional seasonal second quarter of slowdown in Canada, so it's a matter of a couple of weeks to 10 days to two weeks, we're very experienced in moving it back and forth. So it's not a long-term problem if we do see a recovery in Canada to mobilize there.

But we have had a reduction in force in Canada so there would be some rehiring that would take place over some time.

Okay. That's great. Thanks, guys.

Matt, I see we're out of time. I'll turn it over to you for closing remarks.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.